All Forum Posts by: Eric Jones

@Nathan Gesner - I think where I'm coming to on this, after all this feedback and discussion, is I should find a middle of the road approach. I think I'm okay showing SOME flexibility with a tenant who has proven themselves to be honest and trustworthy. But also not so flexible that I expose myself to a lot of extra risk. I'm thinking I'll tell them that at a certain day, say day 10 or 14, I will begin eviction. So that gives them some flexibility, but limits my risk as well. That may be a good middle of the road approach...

In terms of the base rent, before late fees, it's actually right around the market average for local comps... maybe slightly on the high end. I have several other properties within a 2 mile radius of this house so I'm well aware of the market. Why they are willing to live like that and pay those late fees, I can't answer. If it were me, I'd move to someplace cheaper that's more appropriate for my budget. I think they really love the house, the area, and me as a landlord. I think they know that most landlords would show no flexibility, so they appreciate that I've been willing to work with them.... as long as they honor the lease, which they have to a T for the last 4 years. But still, I'd prefer a nice easy, low risk tenant who pays on time any day! My other tenants don't have this issue...

@Nathan Gesner - appreciate your perspective. The scenario you mention where they eventually screw me over, even if it's not a malicious thing, is my biggest concern. In terms of your comments about late fees, I disagree. Banks aren't a fan of late fees because a late loan is treated as a nonperforming loan. The assets on a bank's balance sheet are largely made up of the present value of the future cash flows from the loan portfolio as the primary assets. The present value of the future cash flows of a late or nonperforming loan is low or zero. So for them, it's not a matter of cashflow, it's that it hurts their balance sheet so much and thus book value. It's not because late fees aren't profitable. It's because equity holders of banks don't like seeing the book value erode due to low quality loans. This is why bank equities collapsed in 2008/2009. Why do you think banks sell off nonperforming loans for pennies on the dollar to hedge funds, private equity funds, and investors? It's to get it off their books and clean up the balance sheet. For individual investors like us, it's different... we don't need to maintain a balance sheet for investors. We can collect the late fees and enjoy the cashflow. Apples and oranges comparison. 

@Wesley W. - you act as if I'm getting the short end of the stick and they are getting away scott free. I'm the one who made ~$1500 in late fees LAST YEAR alone. Keep in mind, the security deposit, which I still hold, is $1200. As I said originally, they maintain the house very well and treat like their own home. Your perception of risk changes a bit when you're getting so well compensated to take on that risk. But all the comments about it being risky cashflow are absolutely right, I don't deny that. Maybe I should take a middle of the road approach... something like I set a max limit of 10 or 14 days to be late, at which point I begin the eviction process like clockwork. So then I can still show some flexibility, but also reduce my risk a bit. 

@Anthony Wick - appreciate your perspective. And maybe that's what I need to hear. It's certainly something I've considered. 

I take tenant screening very seriously and I closely look at the character of my tenants up front. I think I'm a pretty good judge of character. I think the fact that they pay all these late fees says something about their character. I have other tenants that have paid late and refuse to pay the late fees and then I'm forced to drop the hammer to show them that there are rules they have to abide by. These are good, honest people... he's the assistant pastor at his church, high school football coach, mentor to inner city kids. These intangibles play a role, in my opinion. Having said that, I'm not worried about them damaging the property like you mentioned. Other tenants I may be, but not these...

I do agree that I'm not necessarily minimizing risk here. And interesting fact - their base rent (before any late fees) is currently on the slightly high end for the market/area. If they were to move out, I'd be forced to charge less rent than what I've become used to collecting. To me it's not always about minimizing risk... sometimes you have a unique situation and have to go with your gut and seize the moment. But I do appreciate your view and haven't dismissed it... this is something I'm working through in my head still...

@Anthony Wick - 

"Long before now I would have asked them why they are continuously late." - I've had this conversation with them several times. It's just a variety of issues... job changes, car issues, kids going to college, banking issues, bad luck... No easy answer or fix.  I moved the rent due date to the 18th several years ago in order for it to line up better with their paychecks. I think the bimonthly rent is a good option. My only concern is then they start falling behind on bimonthly payments and it becomes a big headache to keep track of all the late fees. At that point I'd probably simply terminate the MTM lease. 

Here's the fundamental question to me - why choose to willingly create a vacancy/turnover that is GUARANTEED to cost me money, when I could keep doing what I've been doing and potentially make a lot in the process? Worst case scenario if I do nothing is I'm forced to end the MTM lease and then I'll have a vacancy and turnover anyways. I have a full month's security deposit, and they maintain the house well, so we're not talking about a crazy turnover. The opportunist in me says to ride this out and try to resolve the problem, if possible. This tenant has even asked me about doing a rent to own, which I'd consider at the right price. 

@Account Closed - small world, I see you're from Fairport! It must be something in the water here... we have a lot of good, but really late paying tenants. Ha...

@Michael Noto - they are on a MTM lease. I recognize they are a high risk tenant in certain ways, but I've certainly been rewarded for taking on this extra risk. But they are great tenants for the other reasons that I mentioned in the original post which is why I didn't end it years ago. I keep hoping that they will get caught up and stay caught up... hoping that the potential bimonthly payments in the future will help... 

@Wesley W. - agree that this is a higher risk tenant and it's a business risk. Not really worried about a vacancy or turnover in terms of cash reserves... I have plenty of reserves and a lot of cash coming in from other properties, notes, stocks, bonds, etc. It's just a question of why would I WILLINGLY create a vacancy when I can "ride the bull" and potentially make a lot in the process? A potential loss of rent (eviction due to nonpayment) is better than a guaranteed loss of rent (I end the MTM lease in order to lower my risk and the hassle) and the financial upside is certainly better. 

@Kenny Dahill - I've considered some of these options as well. I actually recently proposed bimonthly payments to the tenant and we'll likely go that route once they get caught up on last month's rent. Ha... Agree with all your other comments. I've done the lease extension technique as well, except I never offer a reduction in current rent to extend. I'll agree to not bump up their rent if they sign a longer lease. For example, if they continue MTM, rent goes up by $25, but if they sign a one or two year lease rent will be held flat.

@Dan Moore - broke vs bad with money... I've been trying to figure this out as well. It's hard to know which it is from a landlord's perspective. But considering they've been paying all these late fees for several years, I'm inclined to say they are bad with money. If they were truly broke I don't think it could've lasted this long. I do electronic payments for all tenants. Probably one of the best decisions I've made with my RE investments... actually have an extra charge if a tenant pays with check or money order... don't have time to run around doing that. This particular tenant pays via Venmo.

Thanks, this is helpful. Given the situation, how late would you let them get before starting or threatening eviction? Once they get around 2.5 to 3 weeks late I get a bit uneasy... not that they are unwilling to pay the late fees, but at some point they won't be able to get caught up, since they clearly aren't good at managing money. 

I've had a tenant now for about 4 years and they are all around good tenants and good people. They have really made the house their home and will likely stay for years to come... The issue is they are late on rent... a lot. In the last 12 months, they've been late 10 times. They are almost always two to three weeks late so they are incurring significant late fees of $100-200 per month on average. Fortunately they honor the lease and pay the late fees, so I've made a killing in the process. Several times I have reduced the late fees a bit to help them out. 

What would other landlords out there do in this situation? Thus far I've done very well by being patient and working with them. I trust that they will continue to honor the lease and pay their late fees, but there is a hassle factor for me as I do get tired of feeling like I always need to chase down rent. Would you deal with the hassle given the fact that they are paying the late fees, or end the lease (month to month) and deal with typical turnover costs in order to find a better tenant?

I have a tax question regarding the mortgage interest tax deduction on investment properties.

Here's the scenario:

1. Currently have a large HELOC on my primary residence (House A)

2. Use the HELOC to make a large down payment on a new primary residence (House B)

3. Move out of House A and into House B

4. Rent out House A and the interest incurred on the HELOC for the down payment on the new house is paid by the tenants on the old house

Is the interest incurred on the HELOC on House A tax deductible since it is being used as a rental property? The cash itself would be used for non-investment purposes (the down payment on House B), but if the debt was incurred prior to moving out of House A, then it's really just my financing strategy for the rental property and should be tax deductible.